PARIS — Euro zone governments should reduce public sector deficits more aggressively and shake up labour law in the name of flexibility, the Organisation for Economic Co-operation and Development said on Thursday.

In a report repeating November forecasts of 2.2 percent GDP growth this year after 2.6 percent in 2006, the OECD said that better economic times should now allow governments to focus on deficit reduction and key economic reform.

The Paris-based organisation defended the euro as a source of price stability but said the monetary union had delivered less economic integration than expected.

"A key lesson from the early years of economic and monetary union is that resilient economies tend to thrive whereas inflexible ones have a rough ride," it said.

OECD chief economist Jean-Philippe Cotis said Germany was the only country pursuing an ambitious policy of deficit cuts, and not just contenting itself with the natural decrease that results from higher rates of economic growth.

While multi-year planning showed signs governments were a bit more serious about the issue, it was not enough, he said.

"Not misbehaving is already not so bad, but it's time to do something good," he told Reuters in an interview.

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The OECD report listed the additional economic reforms that it considered essential, focusing on greater market integration in product markets and financial services and scaling back on job protection and broad forms of wage-setting negotiation.

"Bargaining at the enterprise, rather than sectoral, level and linking wage developments to productivity would help firms absorb shocks by adjusting wages rather than employment and would give workers more incentive to lift productivity because they could share in the gains," the report said.

"Implicit or explicit indexation should be, when possible, abolished, or at least it should be ensured that wage developments are closely aligned to productivity."

The OECD said increasing the potential growth rate of the euro zone depended on shaking up markets to promote integration and greater competition.

"It is important to bear this lesson in mind as the union embarks on a significant wave of expansion," the report said.

"The priority for current and prospective members should therefore be to ensure flexible and competitive markets so as to foster speedy adjustment to economic shocks and a more effective response to macroeconomic policy," it said.